Although your immediate financial situation may be consuming you completely, you need to be informed of your options and how they will affect you, not only now, but in the future. Unfortunately there is not enough reliable information out there, and depending on who you talk to you, you will get a lot of conflicting opinions.
I have put together some information that may help. Through my own experience with foreclosure, bankruptcy, and credit issues I have come across several misconceptions that are commonly held. Hopefully this will help you make an informed decision before choosing to do a bankruptcy, foreclosure, short sale, or none at all.
Disclaimer: I am not a licensed accountant, or a certified attorney, I am just sharing my own knowledge gained from experience.
Misconceptions:
1. A Foreclosure is better for my credit than a bankruptcy
Maybe; maybe not. It actually depends who you talk to on this what answer you get, but ultimately it depends how the action is reported to the credit agency, and how many other negative reports are filed; like the number of ‘late payments’, or ‘non-payments’ related to your mortgage.
A bankruptcy may even “hide” a foreclosure if the property is included in the bankruptcy. This is no guarantee though. To be safe, always try to sell your property, and use a ‘short-sale’ if necessary (if it is included in a bankruptcy) rather than let it go to foreclosure. If the short sale is reported it will show up as a ‘settled debt’ rather than a ‘foreclosure’ (basically a repossession for non-payment, with none of the debt being satisfied). This will also lessen your liability for a ‘deficiency judgment’ later on.
2. I can save my house from Foreclosure if I file Bankruptcy
Actually one has nothing to do with the other. The only thing a bankruptcy does to a foreclosure is that it will slow the process and may help you reduce the amount of your payments to the bank, but you MUST PAY ON-TIME. If you don’t, you lose the protection of the bankruptcy, and the foreclosure process resumes.
However, this is only in a chapter 13. In a chapter 7 your house gets no foreclosure protection – you either keep paying or you’re going to lose it to a foreclosure. (I would recommend a short sale here instead to limit your liability to further credit damage and a larger ‘deficiency judgment.’
3. To Avoid a Bankruptcy, I should use a Debt Management Program to lower my Payments
I’m not supporting bankruptcy necessarily, but an attorney has more leverage to negotiate a lower debt payment for you, as in a chapter 13. If you want to avoid bankruptcy all together, be VERY careful which debt management program you choose to use. If they require a payment upfront HANG-UP the phone immediately; NO MATTER WHAT they tell you! Avoid these services like the plague; I didn’t and my mistake cost me $1400 and a lot of headaches. Don’t let this happen to you. Use a Non-Profit company that only charges a small monthly fee.
If your ultimate goal is to keep your house, and you have the income to do so, your best option is to work with the bank first to see what options are available, and then a chapter 13 bankruptcy. If you are out of money, just focus on saving your credit. To do this don’t let the bank foreclose, instead, find someone you trust to handle selling your house using a short sale as quickly as possible. You may want to file a chapter 7 bankruptcy depending on your amount of other debt and your amount of assets; Or if you can afford it, work with a debt management company to lower your payments on your unsecured (credit cards) debts.
Wednesday, November 12, 2008
Bankruptcy, Misconceptions and My Finances
When facing a foreclosure, or even worse, a bankruptcy, you have to take into account more than just your current financial situation; you have to be aware of the future financial implications. There is some other information you should have before deciding which road to take; there are some future liabilities that you need to be aware of that your attorney, or even your accountant, will not offer information on, that is if they even know at all.
I am going to go thru some common misconceptions you should be aware of before choosing to do a bankruptcy, foreclosure, short sale, or something else.
Misconceptions:
1. If I file Bankruptcy I will be relieved of all my financial obligations.
Not likely. If you file a chapter 13, you are just reorganizing your debt and getting a lower monthly payment. If it’s a chapter 7, a ‘discharge’ of debt, you will not have to pay anything, right? Wrong! You are only protected up to $1000 of personal property (cars, furniture, bank accounts, etc.) unless you relinquish you personal ‘homesteaded’ home, which will give you an additional $4000 (in my home state of Florida) of exempt property. Everything you own gets a value, and above the max $5000 exemption, you must pay for. (This may still be a better way to go than having the liability that comes with a foreclosure, or even a short sale depending on your situation.)
2 . A Short Sale will Satisfy my Debt to the Lender, ending any other Financial Obligation related to the property
Don’t ever let anyone convince you of this! Unless the lender puts in writing that the short sale payoff is “payment in full”, you may be liable for a ‘deficiency judgment’. Unless the property is your primary, (homestead), residence for 2 of the last 5 years, the mortgage (s) were used for purchase and or improvement of the property itself, and the debt is under $2million you are liable for ‘cancellation of debt’ tax. Similarly, you will liable for tax on “Phantom Income” of the difference between the total debt incurred and the short sale payoff over $250,000 even if the home is your primary residence and you didn’t take out an equity line to buy a Porshe.
You may also be required by the bank to sign a promissory note as a condition of the short sale. This means you will make payments to the bank every month to satisfy some of the financial losses that the bank had incurred. Of course, a short sale is ALWAYS better than a foreclosure. The amount of forgiven debt with a foreclosure is always going to be higher (as long as you were ‘upside-down’ in the first place).
3. No Matter What I Do, I’m Going to Owe Money to Someone
Surprisingly, No. As in the above situation for a short sale, there are a couple of ways you can get out without owing anything. Only certain lenders, in certain situations require a promissory note, and if you are “insolvent” you don’t have to pay taxes on the cancellation of debt, or phantom income tax. And if you don’t have any assets, then the bank will not spend thousands in court and attorney fees to sue you for a deficiency judgment.
A bankruptcy, on the other hand, will cost you from $1800 - $3000 or more, depending on the chapter 7,11,13, etc. and if you are doing so for yourself, you and a spouse, your business, or you and your business. This is all upfront, before they even file the paperwork. After that, you will likely be liable for future expenses as discussed in misconception #1.
Disclaimer: I am not a licensed accountant, or a certified attorney, I am just sharing the knowledge that I have gained as an individual who has dealt with foreclosure, bankruptcy, and credit issues first hand.
I am going to go thru some common misconceptions you should be aware of before choosing to do a bankruptcy, foreclosure, short sale, or something else.
Misconceptions:
1. If I file Bankruptcy I will be relieved of all my financial obligations.
Not likely. If you file a chapter 13, you are just reorganizing your debt and getting a lower monthly payment. If it’s a chapter 7, a ‘discharge’ of debt, you will not have to pay anything, right? Wrong! You are only protected up to $1000 of personal property (cars, furniture, bank accounts, etc.) unless you relinquish you personal ‘homesteaded’ home, which will give you an additional $4000 (in my home state of Florida) of exempt property. Everything you own gets a value, and above the max $5000 exemption, you must pay for. (This may still be a better way to go than having the liability that comes with a foreclosure, or even a short sale depending on your situation.)
2 . A Short Sale will Satisfy my Debt to the Lender, ending any other Financial Obligation related to the property
Don’t ever let anyone convince you of this! Unless the lender puts in writing that the short sale payoff is “payment in full”, you may be liable for a ‘deficiency judgment’. Unless the property is your primary, (homestead), residence for 2 of the last 5 years, the mortgage (s) were used for purchase and or improvement of the property itself, and the debt is under $2million you are liable for ‘cancellation of debt’ tax. Similarly, you will liable for tax on “Phantom Income” of the difference between the total debt incurred and the short sale payoff over $250,000 even if the home is your primary residence and you didn’t take out an equity line to buy a Porshe.
You may also be required by the bank to sign a promissory note as a condition of the short sale. This means you will make payments to the bank every month to satisfy some of the financial losses that the bank had incurred. Of course, a short sale is ALWAYS better than a foreclosure. The amount of forgiven debt with a foreclosure is always going to be higher (as long as you were ‘upside-down’ in the first place).
3. No Matter What I Do, I’m Going to Owe Money to Someone
Surprisingly, No. As in the above situation for a short sale, there are a couple of ways you can get out without owing anything. Only certain lenders, in certain situations require a promissory note, and if you are “insolvent” you don’t have to pay taxes on the cancellation of debt, or phantom income tax. And if you don’t have any assets, then the bank will not spend thousands in court and attorney fees to sue you for a deficiency judgment.
A bankruptcy, on the other hand, will cost you from $1800 - $3000 or more, depending on the chapter 7,11,13, etc. and if you are doing so for yourself, you and a spouse, your business, or you and your business. This is all upfront, before they even file the paperwork. After that, you will likely be liable for future expenses as discussed in misconception #1.
Disclaimer: I am not a licensed accountant, or a certified attorney, I am just sharing the knowledge that I have gained as an individual who has dealt with foreclosure, bankruptcy, and credit issues first hand.
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